Published on 5th January 2023

Our recent research paper on Britcoin examined several of the failures in the Fintech digital payments industry that have gone unresolved.

The paper is entitled ‘CAPTURE – BigTech and Digital Payment Giants dominate the committees evaluating the replacement of physical cash with ‘Britcoin’ – a UK ‘Central Bank Digital Currency’’.

You can find a click-through to the full paper here:

Client funds held through Fintechs sould be safe, but ‘safeguarded’ client funds could be lodged in any licenced bank in any country in the world, regardless of the bank’s credit quality, and regardless of the political stability of the country. The owners of the funds – UK businesses and consumers – are wide open to loss.

Despite the contents of Article 105 of the 2017 Payment Services Regulations, Electronic Money Institutions (eMIs) and Payment Institutions (PIs) have found it increasingly difficult to obtain bank accounts at UK banks in which they can ‘safeguard’ customers’ monies.[1] The Payment Systems Regulator (PSR) and the Financial Conduct Authority (FCA) – joint policemen over Article 105 – decided that it was a commercial decision based on risk and return as to whether UK banks had to abide by Article 105, and the banks responded in unison to applications by Fintechs that ‘the returns do not justify the risks’ i.e go away.

The question then arises as to how and where the £18 billion of client funds are safeguarded, this being a recent FCA estimate according to Joshua Stephens of the City Law School.[2]

The amount needing to be safeguarded by PIs has diminished because of rules imposed by the FCA/PSR as to how quickly a PI must discharge a payment contract: so quickly that it has to make the payment with its own money. By the time the customer’s money clears and settles in the PI’s favour, the PI has discharged the payment contract and the money therefore belongs to the PI and need not be safeguarded.

While this has not eliminated all safeguarding by the PI sector, it means that the bulk of safeguarded money derives from the eMI sector. It is not clear how much use has been made of the two safeguarding options beyond a bank deposit (a portfolio of high-quality liquid assets, and an insurance policy). The lack of overall transparency should be unacceptable, but perhaps not as unacceptable as to the opaqueness on where the money is held under the bank deposit option.

‘Safeguarded’ under the bank deposit option ought to mean ‘low-risk’, but it actually means ‘held with a licenced bank’. Revolut, were it ever to obtain a banking licence, would be able to self-safeguard the countervalue of its client liabilities, whereas it is a tenet that the place of safeguarding should be at arm’s-length to the principal organization, whether that be a PI or an eMI.

‘Safeguarded’ used to mean ‘held with a bank licenced in an EEA member state’, but the country restriction has been removed. The prior inference was that all banks in EEA member states were low-risk and indeed of equivalent credit quality because they were subject to EEA-level banking supervision. Now the inference is that all banks anywhere are low-risk because they come under banking supervision.

The prior version was nonsense, and the new version is hyper-nonsense.

eMoney holders are exposed to ‘political risk’ or ‘transfer risk’ on the country of the deposit bank, in case exchange controls are introduced and funds cannot be moved, or if the country defaults and a write-down is imposed on creditors of the country’s banks. These are normal solutions where a country undergoes a balance-of-payments crisis and eMIs enjoy no preferential status that would inoculate them – and the holders of their eMoney – from loss.

eMoney holders are exposed to credit risk on the deposit bank, if it goes down individually whilst the country it is in does not. eMIs are not covered by any deposit insurance scheme; client funds would be subject to the bail-in and be converted into ‘capital-like instruments’ in a resolution of the deposit bank, where a bail-in regime exists. If no bail-in regime exists, client funds are just an unsecured claim on the bankruptcy estate of the deposit bank. eMoney holders have no way of assessing the likelihood of these eventualities occurring, because they are not told the identity of the deposit bank.

Even the prior version limited to the EEA allowed safeguarded funds to be held in any licenced bank in paragons of financial probity like Malta, Cyprus, Estonia, Latvia and Lithuania. The case of the defunct eMI called iPagoo involves Maltese banking regulations.[3] iPagoo had deposited safeguarded funds with unnamed Maltese banks. The availability of these funds to the holders of iPagoo’s eMoney remains in doubt from a legal perspective, as the referenced article demonstrates, but they could also have been lost if the deposit bank had gone down, or if Malta had defaulted on its debts.

The deposit bank could be a type of ‘pocket bank’, itself owned by a Fintech or by the ulimate owners of Fintechs. One such is European Merchant Bank, based at the Business Center Merchants’ Club in Vilnius in Lithuania and 100% owned by Akce Holding Malta Ltd, a company mentioned in the ‘Paradise Papers’ issued by the International Consortium of Investigative Journalists.[4] EMB’s founder is stated as Dr Ozan Ozerk, who is also the driving force behind the OpenPayd group of companies in the UK, which includes two eMIs and the UK establishments of a Maltese and of a Turkish entity. Dr Ozerk is listed at Companies House as the ‘person with significant control’ in excess of 75% in both Superapp Holdings Ltd (which owns the eMI Ozan Ltd) and OpenPayd Holdings Ltd (which owns the eMI Settle Go Solutions Ltd). This structure contributes to these eMIs and EMB not recording safeguarding deposits as having been conducted with ‘related parties’ in their respective accounts: by extension no disclosure in the accounts of the eMIs is required that client funds are deposited with a bank related to the eMI, which in turn makes it appear that the deposit relationship is at arm’s-length and in line with a key tenet of safeguarding. Settle Go’s 2021 annual report on p. 33 shows over £8 million of balances with ‘related parties’, but these are all liabilities – to ‘other OpenPayd Group companies’, to Dr Ozerk, and to ‘other related parties’. EMB’s annual report on pp. 29-30 has a list of conditions as to what counts as a ‘related party’, but the ‘Transactions with related parties’ shown in Note 20 on pp. 40-1 are much smaller at €3.3 million than its deposits from financial institutions and than the safeguarded funds of Settle Go. However all-embracing the definition of ‘related parties’ appears to be, it excludes deposit relationships with eMIs that share common, ultimate ownership.

58% of EMB’s liabilities were to ‘financial institutions’ (€50.3 million, EMB 2021 financial statements p. 12, double the figure at the end of 2020) and it flagged Fintechs as a key market (EMB 2021 financial statements p. 9). One can assume that the client liabilities of Settle Go Solutions sit in a safeguarding account at EMB: these stood at €24 million at 30 April 2021 (Settle Go annual report p. 19). Other eMIs and some PIs may have the funds of UK businesses and consumers ‘safeguarded’ at EMB. The mismatch of accounting dates between those of the eMIs (30 April) and that of EMB (31 December) does not allow a complete tie-up of amounts even between the members of the OpenPayd ‘group’.

EMB has three layers of management with diminishing representation from Lithuania as you go down, and rising representation from Turkey. The personal profiles on the ‘About us’ page of the EMB website are click-throughs to the respective person’s LinkedIn profile, and reliance has been placed here on those profiles. The Supervisory Board is chaired by a resident of Malta who also appears in the ICOIJ profile of Akce.[5] There are then two Lithuanians with multiple other appointments and a Turkish lawyer: a 50/50 split of residents and non-residents, all are non-executives and there is no indication of which of them is the controlling brain. The ‘Executive Team’ of five consists of two Lithuanians resident in Lithuania and three Turks. One of the Turks is resident in Lithuania, making a bare majority of Lithuanian residents at this level, and one of the two Lithuanians at this level (Eugenijus Preikša) has a simultaneous appointment as an advisor to the board of Imlitex Holdings and chairs the audit committee of the board of the Lithuanian railway company, while stating on LinkedIn that his role at EMB is full-time: is it really full-time or is his presence a device to achieve a majority of Lithuanian residents at at least one level in EMB’s management structure? EMB’s ‘Management Team’ of twelve consists entirely of Turks, of whom only two appear to be resident in Lithuania and one in Sweden (and her LinkedIn profile makes no mention of EMB and says she works at JPMorganChase); the remaining nine are both Turkish and resident in Turkey. The above are indicators that EMB may be being managed from Turkey, with Lithuania being a brass-plate and nominee Lithuanian residents being hired on a part-time or non-executive basis to lend plausibility to the bank’s ranking as established in Lithuania and therefore in the EU/EEA when in actuality its substance and controlling brain reside elsewhere. EMB supposedly had an average of 47 employees in 2021 (financial statements p. 8) but one wonders where they work: the Business Center Merchants’ Club sounds like a brass-plate address rather than a financial headquarters. How many desks does that office contain? What’s going on? How much money belonging to UK consumers and businesses is being safeguarded there now, at the end of 2022?

In summary, the safeguarding regime for Fintechs takes no account of ‘political’ or ‘transfer’ risk, requires no minimum public credit rating for the deposit bank, and no assurance that the funds would still be available to eMoney holders if the deposit bank went down i.e. that they would not be bailed-in during a resolution process or swallowed into the deposit bank’s bankruptcy estate and used to meet the claims of other creditors and the fees of the trustee-in-bankruptcy.

One can conclude that safeguarded funds can be anywhere in the world, deposited in banks with no public credit rating, and in banks against which amber (if not red) flags might be raised because of their location, shareholders, management, business connections and so on.

No-one in their right mind would call this a proper safeguarding regime for funds belonging to UK consumers and businesses, but it accords with the very narrow definition issued by the UK’s financial regulators. Holders of iPagoo’s eMoney look set to only receive a fraction of the value of their holdings, which is proof enough that their funds were not safeguarded in a meaningful sense.

This is really basic stuff, and yet another major detriment for UK consumers and businesses brought about by the Fintech industry and unresolved by financial regulators.

[1] There are three options for safeguarding customer funds: (i) holding them at a Credit Institution; (ii) investing them in high-quality, liquid assets like government bills; (iii) setting up an insurance policy that pays out when a firm goes bankrupt, and which must pay out for the benefit of customers and not to the bankruptcy estate of the firm

[2] accessed on 3 January 2023

[3] accessed on 3 January 2023

[4] accessed on 3 January 2023, and 2021 financial statements of EM Bank; see accessed on 4 January 2023 for ICOIJ information on Akce Holding Malta Ltd

[5] accessed on 3 January 2023